Betting Exchanges

Betting exchanges have been around for over a decade, but there are still people who don’t understand the concept as it is quite different from regular betting at bookmakers which we have become accustomed to.

In this article we will describe the differences between betting exchanges and what the bookmakers are offering, as well as focusing on the advantages of this fairly new concept of betting.

What are Betting Exchanges?

Betting exchanges are transactions made between gamblers, where the bookmaker is only there to make sure that the transaction occurs and for that it charges a small commission which can be anywhere from 2% to 5%.

The most famous betting exchange provider is Betfair. What Betfair does is to connect punters who have opposite views on the outcome of a match or a competition. In its simplest form betting exchanges enable one gambler to ‘back’ a player, a team or a horse to win, and the other gambler ‘lays’ the same player, team or horse to lose.

A bet can only be accepted if it is matched by another gambler. So for example, if you are backing Afghanistan to beat Zimbabwe in an ODI match, there must be another customer who believes that Zimbabwe and not Afghanistan will be the winner of the match. In this situation you are the one ‘backing’ the bet and the other gambler is ‘laying’ the bet.

Sites like Betfair use advanced technology software which matches bets in an instant. If there are four figure bets, then the likelihood is that these bets will be matched – ‘laid’ by more than one gambler.

In betting exchanges are usually represented in decimal terms and instead of the fractional 2/1 you would get the decimal 3.00. A stake of $1 would return $3 with the stake included.

Most of the betting exchange business happens using credit or debit cards, provided that you have opened an account with the betting provider which provides you with a username and a secure password.

Finally, gamblers who lay the bets must make sure that they deposit enough funds to cover their bets. For example, if the odds that the layer is offering for Afghanistan beating Zimbabwe are 1.67 and another gambler backs this result with a $100 deposit, then the layer must make sure that he has at least $167 in his account to pay out the backer if this turns out to be a winning bet.

Advantages of Betting Exchanges

There are many advantages connected to betting exchanges, especially when you compare them to regular bookmakers. The most important ones however, are the real odds that gamblers get and the chance to trade your bet so that you always guarantee a profit for yourself.

Real Odds

The biggest advantage of betting exchange websites such as Betfair is that they are free markets and that the odds are not set by the bookmaker. For example, if you want to find the best odds that regular bookmakers are offering you have to browse around town or check different providers’ websites.

And even if you do that, in the end what you are bound to find is that betting exchange prices are much higher than the highest prices that bookmakers offer. This is because with betting exchanges there is no, what is known as an overround.

An overround or a bookmaker margin is the adjusting of true odds into odds which ensure that the bookmaker always makes a profit of a given wager. For example, when Afghanistan are playing Zimbabwe the relative probability of an Afghanistan win is 60% (1.67) and the probability of a Zimbabwe win is 40% (2.50). As you can see, when combined together, they add up to the expected 100%.

However, when a bookmaker adjusts the odds he would always go over the expected 100%. For example, an Afghanistan win will be priced at 70% (1.43) and a Zimbabwe win will be priced at 50% (2.00). As you can see the odds are much lower. Below you see a representation of your real winnings compared to your adjusted odds winnings with which the bookmaker always makes a profit.

Real Odds (Betting Exchanges)
Afghanistan to win     $60 stake at 1.67 - to pay out $100
Zimbabwe to win        $40 stake at 2.50 - to pay out $100

Adjusted Odds (Bookmaker)
Afghanistan to win     $60 stake at 1.43 - to pay out $85
Zimbabwe to win        $40 stake at 2.00 - to pay out $80

It is clearly visible that in betting exchanges all the money that goes on backing a winner is eventually returned and nothing stays with the betting provider.

However, when a bookmaker moderates wagers, the same stakes yield smaller profits for customers, meaning that the $100 the bookmaker receives are only paid out as $80 or $85 to customers. This means that whatever the outcome of a match the bookmaker always wins.

Trading

A trader in betting exchanges is very similar to an arbitrageur in normal betting (a gambler who safeguards his bet by betting on the opposite outcome to minimize losses or to ensure profit). Betting exchanges give gamblers the chance to trade on sporting events so that they ensure profit.

For example, a trader can bet on Royal Challengers Bangalore to win the IPL at odds of 4.00 by placing a stake of $100.

However, if the chances of Royal Challengers Bangalore of winning the IPL increase due to, let’s say the Sunrisers Hyderabad or the Mumbai Indians not mounting a challenge, then their odds of winning the IPL will decrease to somewhere around 2.00.

In this situation a trader can switch from backing the Royal Challengers Bangalore to win, to laying them with $200 to lose at odds of 2.00 so that he can lock in a guaranteed profit of $100 whichever the final winner of the IPL is.

Trading Example

                             Odds    Stake    Potential Winnings/Losses
Back RCB to win the IPL      4.00    $100              $400

Lay RCB not to win the IPL   2.00    $200             -$200

This means that the following situation will occur in which no matter which team wins the IPL you will still end the season as a winner with a guaranteed profit:

Possible Winnings from Backing				$400					
Total money invested (Stake + Money Laid)		$300					
Profit							$100

Possible Winnings from Laying				$200
Total money invested (Stake)				$100
Profit							$100

This example emphasises just how useful trading can be if the situation is favourable i.e. if odds are getting lower.

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